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MSMEs shun insurance cover, grounded by fire accidents

Ladipo market

In this piece, TUNDE AJAJA examines the rate at which fire and other insurable risks force many micro, small and medium-sized enterprises’ owners out of business, plunging many, including their dependants, into poverty while also impacting negatively on the economy

On the veranda of a nearby building overlooking what remained of her shop, completely razed by fire on December 15, 2022, Mrs Folashade Idowu sat quietly and rubbed her tired eyes intermittently, a clear testament to weeks of crying.

Since a fuel-laden tanker lost control and rammed into shops – including hers – at the popular Apata market in Ibadan, Oyo State, and caught fire, Idowu, who used to sell building materials, said it still looked surreal that all her investment went up in flames within minutes.

On account of the loss, she said her high blood pressure had been on the increase, her children had stopped schooling, feeding had become difficult, her indebtedness to a microfinance bank she took a loan from had remained unserviced and the people who kept money with her were already demanding their funds.

“The shop was also my house; all my clothes, my goods and cash were burnt and everything would be in millions,” she told our correspondent during a visit a few days ago.

Clearly, there was little Idowu could do to avert the incident, but her loss could have been substantially mitigated if she had insured her business against a risk like fire. But because she had no insurance cover, like many others whose shops were also razed down, she said the incident had plunged her into deep misery and led to a sudden end to her once thriving business. “Now, I wake up to nothing, unless God helps me,” she said.

The place of insurance

Asked why she didn’t consider insurance for the business, she said, “It’s not that I don’t know about it, I just didn’t think about it.” And when asked if any insurance company had approached her before, she said none.

“Nigerians should please help me,” she appealed. “If I can raise money to start again, I will be able to pay off my debt. Definitely, if God helps me to start again, I will insure the business.”

Conscious of the poor attitude to insurance in the country, governments at different levels often promise to assist people and traders whenever they suffer such losses. Indeed, the Oyo State Governor, Seyi Makinde, visited the scene and released N10m to assist the traders, out of which a paltry N100,000 was given to Idowu.

“When I begged the person that shared the money if I could get more because of what I lost, he said I should go and complain at the secretariat. I need help,” she sobbed.

Lack of insurance and gradual depletion of MSMEs

In the incident that consumed Idowu’s shop, other traders whose shops were also destroyed lamented to our correspondent that they had no insurance cover and didn’t know how to start again.

One of the traders, Ifeoma Sunday, who used to deal in beer and other beverages, said she had just stocked her shop in preparation for Christmas when it happened.

She stated, “For people who sell drinks, Yuletide is a boom time, so we usually don’t hesitate to borrow to stock our shops. I had just taken loans to buy goods but I lost all of them. I was in the shop with my mum when we heard a loud noise from outside. We ran out and saw the tanker in flames.”

On how to start again, she said, “I really don’t know. I am appealing to Nigerians for help. The money given to us by the governor was not fairly shared by those in charge. When we complained, they promised the issue would be revisited after the Yuletide but no word on it since then.”

On why she didn’t consider insurance, she said, “I only hear people talk about insurance for their vehicles and mansions, but not for businesses. Nobody has approached me before, so I’m not knowledgeable about it. If God helps me to start again, I will do it because now feeding has become a problem.”

Apart from the December 15 incident, 25 other shops in the Araromi spare parts market in the Agodi area of Ibadan were also consumed by fire on January 14, forcing many traders out of business.

Fire-induced losses, a nationwide challenge

Across the country, thousands of MSMEs have been lost to fire and other insurable risks like the Covid-19 pandemic that resulted in the closure of about two million businesses.

In Anambra State, there have been no less than four fires in Nnewi within the last three months. On November 18, no fewer than 12 shops were destroyed by fire at the Nkwo Umunze Market. On the 28th, no less than 600 shops near the Onitsha Main Market were razed with goods worth billions of naira destroyed. On December 10, shops at the Ogbo Osisi Timber Market Bridgehead in Onitsha were also razed, among others.

Bothered by the impact of the loss when he visited one of the scenes in November, the state deputy governor, Onyekachukwu Ibezim, said, “How many traders have insurance? I have always asked this question. Insurance helps to cushion effects of this nature. This is the kind of structure we want to lay and we will get there. We will expose you to these insights; this is what the government has come to do.”

In 2022, no fewer than 400 shops – in the MSME category – at the Nguru popular market in Yobe State were destroyed by fire, as the victims resorted to crying for help. In Bauchi State, several shops were razed in March 2022 when fire gutted the food market, the same way about 250 shops were destroyed in January 2022 at the Nnewi foodstuffs market.

In Lagos State, the nation’s commercial capital, there have been many fires that led to the closure of businesses, the latest being the Thursday incident at the popular Balogun Market during which many shops were also burnt.

Sadly, fire is a major risk in Nigeria. The Ministry of Interior disclosed in its recent scorecard that there were 11,109 fire incidents between 2015 and September 2022, while property worth N3.19tn was destroyed.

In most instances and from interactions with the victims, most owners of such businesses didn’t have insurance and are unable to raise funds to start again.

Victims

And as the World Bank also noted in its Small and Medium Enterprises Finance report, MSMEs owners rely mainly on internal funds or cash from friends and family.

Nigeria’s MSMEs market

According to the Small and Medium-sized Enterprises Development Agency of Nigeria, there are about 39.65 million MSMEs in Nigeria, which accounts for 96.7 per cent of businesses in the country, 49.7 per cent of the Gross Domestic Product and 87.9 per cent of employment.

This is evident as they dominate the trade and general commerce sector, agricultural value chain, services (including artisans), cottage industries, manufacturing and several other sectors.

But due to insurable risks like fire, the pandemic and some other factors that led to the closure of businesses, a joint report by SMEDAN and the National Bureau of Statistics in 2022 indicated that MSMEs’ contribution to the GDP dropped to 43.31 per cent while their volume dropped from the 41.5 million in 2017 to the 39.65 million.

Meanwhile, a report powered by Kippa on SMEDAN’s website quoted the World Economic Forum as saying MSMEs represent around 90 per cent of all firms globally, provide roughly 70 per cent of all employment and contribute about 70 per cent of global GDP.

“This proves that small and medium-sized enterprises are the engine that pushes global economies,” it noted.

Indeed, in large economies like the United States, MSMEs account for 99.9 per cent of all businesses and 47.1 per cent of the private workforce and in China, they are 98.5 per cent of all firms, 80 per cent of non-government employment, contributing over 60 per cent of GDP. In Japan, they represent 99.7 per cent of companies and in Germany, they account for 99.6 per cent of firms and 58.5 per cent of jobs.

Findings showed that part of what has helped MSMEs to foster economic prosperity in these economies is their robust MSME commercial insurance market, in addition to better operating environments.

For example, Swiss Re, a Switzerland-based reinsurance and insurance company, in a report titled ‘SME insurance in China’ said its research into five international SME insurance markets including the US and France showed that distribution channels like banks, agents and industrial associations played a key role in increasing SME insurance penetration.

The report added, “SMEs have a close relationship with these intermediaries and are especially closely bonded with industry associations. In addition, customised insurance products such as insurance packages including industry-related endorsements have bolstered the advantages and attractiveness of being insured.”

Why Nigerian MSMEs shun insurance

Insurance penetration in Nigeria is low, at about 0.5 per cent, which is lower than what obtains in South Africa, Morocco, Egypt and many smaller economies in Africa. And according to the Lagos Chamber of Commerce and Industry, only 0.5 per cent of SMEs in Nigeria have an insurance policy, compared to the global average of 54 per cent. Nigeria’s low insurance penetration has been tied to low awareness, low standard of living and cultural beliefs.

And according to the NBS and SMEDAN joint report, only 1,725,143 out of the over 39 million MSMEs have insurance, with agriculture accounting for 39.6 per cent, wholesale/retail trade, 28.7 per cent, followed by transport/storage sectors.

The Vice-President of the LCCI, Mr Gbenga Ismail, who spoke at a webinar, with the theme, ‘Importance of Insurance for SMEs: Insurance requirements for a growing business’, jointly organised by Coronation Insurance Plc and Coronation Life Assurance, noted that the survival of the MSMEs was critical to the growth of the economy.

He stressed that an insurance environment that would be accommodating and appealing to MSMEs needed to be created because insurance remained critical to managing shocks and financial resilience.

But with the advantages, why don’t MSMEs embrace insurance?

The National President, Association of Small Business Owners of Nigeria, Dr Femi Egbesola, told our correspondent that it was a reflection of the general apathy towards insurance in the country.

He said, “For MSMEs, there are fire-induced losses almost every day, whether on a small or large scale,  and most times those businesses are unable to recover, which is where insurance is supposed to come in. But most times when there are claims, it’s either insurance doesn’t pay or they underpay or the payment is overly delayed, which fuels the apathy. Also, the insurance companies are not doing enough publicity to educate people and advertise their products.

“However, the key issue for those of us in business is that the insurers don’t have policies that are directly related to MSMEs. Most times, they have general policies and the premium might be unaffordable to us. What is even the working capital of some of these MSMEs? If insurers come up with affordable products with flexible payment plans, it will be easy for us to patronise them.”

Also, an economist and Chief Executive Officer, Centre for the Promotion of Private Enterprise, Dr Muda Yusuf, blamed the low insurance coverage among MSMEs on culture, poor perception of the industry and general apathy.

The Chief Client Officer at AXA Mansard Insurance, Mrs Rashidat Adebisi, said low awareness remained a major challenge, noting however that while insurance companies had more work to do in terms of product development, there was no dearth of insurance products for MSMEs.

She said, “For example, we have Business Insurance Plans that cover MSMEs for fire, burglary, personal accidents for their employees, health insurance, public liability and so on for as little as N52,000 annually, which can even be paid monthly for less than N5,000.”

The International Association of Insurance Supervisors in a report titled ‘Supporting responsible MSME insurance’ also observed that due to a lack of direct experience of insurance or previous exposure to exploitative products and unfair treatment, MSMEs often lack trust in insurance or a low perceived value of insurance as a risk mitigation instrument.

It however cautioned, “Insurance is one instrument that helps small businesses become more resilient, thereby boosting sustainable development.”

The Executive Secretary, Nigerian Council of Registered Insurance Brokers, Mr Fatai Adegbenro, also blamed the low insurance penetration among MSMEs on ignorance. He argued that there were many affordable products MSMEs business owners could procure.

He said, “It’s ignorance. Let’s take fire as an example, given how rampant it has become. For insurance cover against fire for N1m worth of property, for example, you pay about N3,500 premium. If you divide N3,500 by 12 months, it’s less than N300 per month. Are we saying they cannot protect their investment, future and peace of mind with about N10 daily?

“Another excuse people give is that it amounts to a loss if they don’t suffer any loss, but I ask, what if you suffer that loss? What of the psychological relief you get, instead of high blood pressure? Does it mean you would rather save your N3,500 than lose N1m?”

He said there were policies that would fittingly meet the needs of MSMEs, noting that it’s best they go through registered insurance brokers who would guide them, get them a better package at a lower cost as well as do the logistics for them.

“It’s naivety not to insure,” he said, admitting however that insurance companies were not doing enough to sensitise people to the essence and the products available.

He concluded, “If insurance is embraced, people and businesses will be better for it and it will help the economy.”

Towards improved MSMEs insurance

Some stakeholders and experts told our correspondent that if the right things were done, it was possible to make more MSMEs embrace insurance.

Egbesola noted that rather than the usual practice of sending random marketers to sell their products to business owners, insurers should go through traders’ associations and groups.

He stated, “When you want to do things in specific sectors, like the informal sector, it is best to go through membership groups and associations because people tend to believe their people or leaders.

“We also discover that many of their salesmen are not adequately trained for the task. Sometimes, you ask them basic questions like ‘where are your branches?’ and they cannot answer. The appearance of some of them can also make you doubt the reliability of the company. That mismatch can be discouraging too.”

He tasked insurance companies to come up with tailor-made policies for MSMEs, which would be affordable and accessible.

He said insurers could also collaborate with financial institutions to make premium payment more flexible because “indeed when there are losses, we need money to continue and the newly released macroeconomic outlook for 2022 released in January rightly identified finance as the topmost challenge of MSMEs.”

He called on the government to explore ways of encouraging business owners to embrace insurance, noting that it would be helpful if there were insurers focused on MSMEs.

Also, Yusuf noted that most of the risks MSMEs face were insurable.

He added, “Insurance is critical to the survival of small businesses because it helps them to manage risk, but many of the products have been static for many years and the risk environment is changing by the day, so the products need to align with those risks.

“When people do not get their claims or it is delayed, the story spreads, but when they are paid their claims, nobody hears about it. The industry players need to work on that perception.

“There is also the aspect of legislation and enforcement; there are some levels of insurance that are supposed to be compulsory, but the framework for enforcement is extremely weak.”

Also, Adebisi of AXA Mansard said it was high time MSMEs saw insurance investment as part of their operating cost.

Adebisi

She noted, “There is an assumption that business insurance is expensive, so MSMEs don’t bother considering it. Insurance companies must create more awareness for their products and help people know that it’s not expensive and that we can be trusted when the unforeseen happens. When a business survives, it’s good for it, the investors and the economy.”

She called for synergy among all the stakeholders, noting that insurance could be listed as part of the criteria to secure some support.

She added, “Insurance can play a significant role in helping to build a resilient MSME sector. If we agree that the MSME sector is a lubricant to the economy of any nation, then it says a lot about what any threat to such a sector can mean to the economy if destabilised significantly.

“The #EndSARS incident and the xenophobic attacks on small businesses are recent reminders of the possibilities that insurance can bring to the business environment. According to the Nigerian Insurance Association, insurance claims paid were about N11bn. The businesses that have benefited from these claims were are able to bounce back and continue to deliver value to the economy.

“This is in contrast with what has been happening with the unfortunate incidents of fire and flooding that have impacted small businesses in the past few months. What is even more worrying is that instead of insurance, the government becomes the safety net for these small businesses. This impacts the economy significantly and we need to change the narrative where we can now warehouse business risks in the right place, which is with insurance companies.”

Meanwhile, according to the SMEDAN report, lack of access to finance is the topmost challenge militating against MSMEs in Nigeria.

Adegbenro stressed in an interview with our correspondent on Wednesday, “Every business owner needs insurance. In countries where people really embrace insurance, when they suffer losses, they don’t cry to the government, they simply file for claims and go back to business. There is even no amount the government will give that can be enough.”

He said apart from the financial independence that it brings about, insurance remained a reliable tool for protecting assets and liabilities, especially for those who take loans to run their business.

A regional perspective

A Senegalese insurance expert and Directeur General, Assuraf, Souleymane Gning, stated that though MSMEs had the most numbers in many countries, insurance companies mostly focused on big companies partly because of the size of the risk involved.

He stated in a virtual interview with our correspondent on Wednesday, “In Senegal, which I think is what obtains in other countries in the region, you can list on your fingers the big enterprises, but they have higher risks, so most of the insurance companies forget about the MSMEs. It’s either they (insurers) see them as too small or they prefer to first focus on the big ones before putting any commercial effort into the others. It’s also possible that the insurers cannot adapt to as many potential clients as possible in the MSME class.”

On the reasons why the MSMEs don’t go for insurance, he narrowed it down to cost, coverage and access. He explained, “The first thing is the high cost of the insurance because they ask themselves if there is tangible value in it and if the risk is high enough for them to pay the premium. The second factor is coverage. Contrary to what insurers can do with big enterprises, the coverage would need to be specifically adjusted to meet the needs of the MSMEs. I also feel insurance companies feel they are more at risk with SMEs, so they tend to insert a lot of exclusions.”

On the issue of access, he said MSMEs do not have time to run after insurance companies, coupled with their perception that the insurers are not necessarily addressing their needs.

Way out?

He said insurance companies needed to provide products that are specific to MSMEs in terms of coverage and their purchasing power, and that “there is a need for a lot of marketing, not selling by force but educating MSMEs on the risks, the products, why they need it and why they are at risk if they don’t take it.”

He said Senegal was trying to drive insurance inclusion with a focus on private individuals and small businesses for them to get minimal insurance, such that when they suffer any loss, it may not cover all they lost, but they won’t be out of business either.

He stated, “For example, if you have a business of $1m, if you cannot afford the premium for that, if at least you can pay the premium for $200,000, it could get you going if something happens. With that, it won’t be a total loss, and you could have something to start with. Loss is not always under your control or dependent on some wrongdoing from a person, it can be fire or climate-induced events like floods or thunderstorms. We need to guard against these losses.”

Incentives as motivation

He also cautioned against making insurance mandatory for MSMEs, noting that it could make some of them prefer doing their business informally. He however advocated the provision of incentives to encourage them.

He said, “If the government makes insurance mandatory, it might also need to subsidise it for them. I feel it’s better to put in place incentives for them to get insurance, maybe through tax benefits or making them eligible for some benefits or making basic insurance a pre-condition to get a government contract. In the long run, more businesses will be covered, and I think that is a good start.”

Just like Gning, Adebisi advocated the introduction of incentives to encourage MSMEs owners. “This is something that will be new to this market, but the government and the regulator can consider things like tax rebates, etc., for MSMEs that have insurance for their business operations. This would signal its importance to everyone and drive trial and adoption,” she noted.

Interestingly, in its National Policy on MSMEs (2021 – 2025), SMEDAN, in a bid to reduce the funding gap for MSMEs, proposed tax incentives to encourage them to imbibe a savings culture and embrace training. It is also believed that such incentives should be introduced to encourage them to insure their businesses.

Until such initiatives are in place, thousands of displaced MSMEs owners and their dependants risk being plunged into poverty, adding to the 133 million Nigerians already in multidimensional poverty. This could also cripple Nigeria’s chances of attaining the United Nations’ SDG one, which is ‘No Poverty’.

MSMEs and national development

The Nigerian Economic Summit Group in its 2023 Macroeconomic Outlook, with the theme ‘Nigeria in transition: Recipes for Shared Prosperity’, said growing the private sector, which MSMEs are an integral part of,  would help to create economic opportunities and prosperities and strengthen Nigeria’s pursuit of pro-poor economic outcomes such as job creation and reduced poverty.

The LCCI vice president also said, “Despite 90 per cent of SMEs currently not paying tax, SMEs represent a huge potential to drive economic inclusion, broaden prosperity and power the future growth of the Nigerian economy.”

According to experts, there is a need for Nigeria to examine economies that have a working SME insurance framework, like the Philippines, where the IAIS noted that “insurers are more advanced in serving small businesses and they have many multi-risk products offered through financial institutions.”

It concluded, “Empowering MSMEs to cover their insurable risks contributes to a healthier MSME sector, which has a large aggregate positive impact on the economy as a whole and impacts the social protection of a huge segment of society. The sheer number of MSMEs and people involved in them makes them a significant element in inclusive insurance market development.”

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